Honeywell hon had to pay higher incentives to commercial planemakers in the second quarter to select its equipment. The company was also hurt by lower demand for helicopters due to weak energy markets.

The company said on Thursday it expects 2016 earnings per share of $6.60-$6.64, down from its previous forecast of $6.60-$6.70.

Honeywell’s core organic sales are now expected to be down 1-2% for 2016, compared with a 1% decline it had estimated previously.

David M. Cote, CEO of Honeywell, on Green Renovations for Buildings

Honeywell said the revised forecast also reflected the separation of its automation and control solutions business into two new reporting segments and the impact of acquisitions and divestitures.

The company also said it had recast results for the first and second quarter to reflect the adoption of the Financial Accounting Standards Board’s accounting standards for stock compensation, ahead of the mandatory effective date in 2017.

The company has recorded tax benefits of 3 cents in the first quarter and 4 cents in the second quarter.

How to Defend Against Russia and China: Missiles, Missiles, and More Missiles

As the House Armed Services Committee (HASC) works its way through a marathon markup of the 2017 defense budget today, a certain theme is emerging. If the House gets its way, the Pentagon will receive millions of extra dollars to develop and deploy a range of new long-range missile (and anti-missile) technologies on land and at sea, aiming to counter what HASC clearly sees as a growing threat to U.S. military superiority.

Included in the HASC chairman’s markup of the defense budget: funding to explore new offensive missiles for the Navy’s amphibious ships (which currently have none), land-based anti-ship missiles and longer-reaching land-attack batteries for the Army, and futuristic electromagnetic railguns that can knock incoming missiles out of the sky.

The missile threat, for its part, is real. When security experts talk about U.S. military power, they often talk about fighter jet superiority, aircraft carriers that project power across the globe, and a range of air and space-based reconnaissance capabilities that make U.S. forces smarter and better-informed than their adversaries. When they talk about potential future adversaries that could limit the ability of U.S. forces to operate freely abroad—a concept known in military circles as Anti-Access/Area Denial, or A2/AD—they talk about missiles.

Where China is concerned, it’s a range of ballistic missiles, perhaps most notably the DF-21D anti-ship ballistic missiles known unambiguously as the “carrier killer.” Security experts and officials routinely wring their hands over the advanced state of Russian missile technology as well as its proliferation. (Authorities believe a Russian surface-to-air missile shot down Malaysia Airlines Flight 17 over Ukraine in 2014, and Russia’s recent sale of its advanced S-300 surface-to-air missile systems to Iran has rankled Western security officials as well.)

Iran’s own homegrown ballistic missile program further worries the Islamic Republic’s Middle Eastern neighbors—as well as the Pentagon—as its long-range missiles could be used to strike at Israel or other U.S. allies in the region. North Korea has captured several news cycles in recent weeks by testing various missiles, the means by which it could turn its small nuclear arsenal into a massive global threat.

It’s little wonder then that HASC is taking the missile threat so seriously in its defense budget markup. Congress would like to see the Pentagon close the gap between countries with lots of long-range offensive missiles and the U.S. military, which has lately focused more on defensive missiles than offensive ones.

The first way HASC wants to turn that around is by ordering the Navy to look into installing missile tubes on the Navy’s amphibious ships—transports that currently have no missile power and are used to ferry Marines. The Navy’s Vertical Launch System missile tube can accommodate a range of both offensive and defensive missiles, so adding them to its fleet of assault ships could create two dozen new missile-launching platforms over the next several years.

The committee also wants to add $5 million to the Army’s budget for “examination of Army land-attack and anti-ship capability.” The Army already has land-based missiles designed to attack land-targets, but its missiles are out-ranged by some adversary systems. The longest-range Army projectile can travel just under 200 miles. Part of that $5 million would go toward exploring a new missile that will top 300 miles in range.

The rest would go toward taking a page out of China’s playbook. China (as well as Iran) relies heavily on its arsenal of land-based, anti-ship cruise missiles designed to ensure that it can threaten potentially hostile (read: American) warships operating near its shores. The U.S. Army doesn’t even have a land-based, anti-ship missile in its arsenal. The HASC version of the defense budget would throw some money at developing a similar land-based weapon to help defend U.S. allies in the Pacific and elsewhere from potentially hostile (read: Chinese) naval vessels.

For more about missiles, watch:

The HASC markup also adds $10 million to the $15.4 million already earmarked for research and development of an electromagnetic railgun for the Navy. Railguns use electromagnets (rather than controlled explosions) to accelerate massive metal projectiles to extremely high speeds. The high speed and low cost of these projectiles make them attractive as both offensive artillery pieces and means of shooting incoming missiles out of the sky. Both BAE Systems baesy and General Dynamics gd have demonstrated railgun technology for the Navy and Army, respectively.

HASC isn’t just concerned with the U.S. military’s ability to win a high-tech missile fight. The committee’s defense bill markup would add $200 million in additional funds to help produce various Israeli missile defense systems, including the so-called Iron Dome missile interceptor system and David’s Sling, a medium- and long-range air defense system. Both are co-produced by Israel’s Rafael Advanced Systems and U.S.-based Raytheon rtn.

Saudi Arabia Wants to Make Half of Its Military Purchases Domestically

As part of a larger shakeup designed to move Saudi Arabia’s economy beyond oil, Deputy Crown Prince and Minister of Defense Mohammed bin Salman Abdulaziz Al Saud said on Monday that the country—the world’s third-largest military spender—will direct half of its military expenditures toward domestic industry.

During a televised address on Al Arabiya television, Prince Mohammed—second in line to be king and widely considered the power behind the throne—laid out a range of economic reforms that would radically transform the Saudi economy. Among them: Placing the kingdom’s armaments industry into a government-owned holding company by the end of 2017 that will direct and oversee the development of a new, domestic defense sector that is now virtually non-existent.

Saudi Arabia overtook Russia in 2015 as the world’s third-largest defense spender, growing expenditures by 5.7% to $87.2 billion amid a concerted and costly aerial bombing campaign against Iran-backed Houthi rebels in Yemen. Yet the country only spends roughly 2% of that on military goods produced domestically, the prince noted.

“Does it make sense that we are the world’s fourth-largest military spenders in 2014 and third in 2015 and we do not even have a local military industry?” he said during the Al Arabiya interview. “We spend more on military than the [British], more than France, and we do not even have a local military industry.”

By boosting the percentage of purchases from domestic industry to something between 30% and 50%, Saudi Arabia hopes to create thousands of new jobs while diversifying the kingdom’s energy-centric economy over the next 15 years. The move would also reduce Saudi Arabia’s dependence on U.S. military exports amid heightened tensions between the two nations.

That doesn’t bode well for U.S. defense contractors in the long term, which have long profited from what was once a dependable and regular free flow of cash and military equipment between Riyadh and Washington. Saudi Arabia owns the world’s third-largest fleet of Boeing ba F-15 fighter jets and purchases ground vehicles and other weapons and systems built in whole or in part by companies like Lockheed Martin lmt, General Dynamics gd, and Raytheon rtn.

For more about the defense industry, watch:

But thawing relations between the U.S. and Iran—Saudi Arabia’s major rival in the region—and tensions over reports of indiscriminate bombing of civilian areas in Yemen by the Saudi Royal Air Force threaten that once-solid military relationship. Moreover, if Saudi Arabia can shift away from its dependence on American weapons and military systems, it could rob the U.S. of some of the leverage and influence it has traditionally had with the Saudi government.

Yet Prince Mohammed cited the U.S. as a model for how the kingdom would like to revamp its approach to defense spending in the future.

“When I enter a Saudi military base, the floor is tiled with marble, the walls are decorated, and the finishing is five stars. I enter a base in the U.S., you can see the pipes in the ceiling, the floor is bare, no marble and no carpets. It’s made of cement. Practical,” he said. “We cannot be the third largest military buyer in the world while our military is rated in the twenties when it comes to effectiveness; there is something wrong.”

U.S. Army Finds Its New Communications Network Is Vulnerable to Hackers

The U.S. Army’s new $12 billion mobile communications system remains vulnerable to hackers, according to a recent assessment by outside security experts, prompting a series of further improvements.

Already in use in Iraq and Afghanistan, the Warfighter Information Network-Tactical Increment 2, or WIN-T, system is supposed to allow for protected voice, video, and data communications by troops on the move. In June, General Dynamics won a $219 million order for communications systems to go in more than 300 vehicles.

Government overseers have regularly criticized cyber security features of WIN-T in reports over the past few years, prompting an outside review by Johns Hopkins University and the Army Research Laboratory. The public reports do not disclose specific vulnerabilities, however.

The outside review “recommended both improvements to user training techniques and procedures and hardware and software enhancements to harden against the cyber threat,” Army spokesman Paul Mehney said in a statement. “As with any network system, cyber protection enhancements are an ongoing effort.”

General Dynamics did not respond to a request for comment.

Last year, the Defense Department’s Operational Test & Evaluation unit warned again about the vulnerabilities and noted that there was a risk to the entire defense network, since many systems were interconnected.

“Although improved, WIN-T Increment 2 continues to demonstrate cybersecurity vulnerabilities,” the unit said in a summary report of the status of the program. “This is a complex challenge for the Army since WIN-T is dependent upon the cyber defense capabilities of all mission command systems connected to the network.”

The system brings together a variety of technologies, including satellite transmissions, radios, and line-of-sight communications.

Senate Resolution Would Restrict Weapons Sales to Saudi Arabia

The U.S. defense industry has sold at least $33 billion worth of weapons to its Persian Gulf allies over the past year as dual bombing campaigns against the Islamic State in Iraq and Syria and Houthi rebels in Yemen have depleted stores of aerial bombs and other munitions. But as civilian casualties mount in Yemen in particular, a bipartisan duo in the U.S. Senate is working to tighten the free-flow of weapons and cash between the U.S. and one of its most important Gulf allies.

Sens. Chris Murphy (D-Conn.) and Rand Paul (R-Ky.) introduced legislation on Wednesday that would restrict the sale of U.S. aerial bombs and missiles to Saudi Arabia unless certain conditions are met. Those conditions stem from repeated allegations that Saudi aircraft indiscriminately strike ground targets without regard for civilian casualties. The Saudi Royal Air Force has waged an intense bombing campaign against an Iran-backed Houthi rebellion that has embroiled Yemen in civil war since March of last year.

“Saudi Arabia is an important partner, but we must acknowledge when a friend’s actions aren’t in our national interest,” Sen. Murphy said in a written statement. “I have yet to see evidence that the civil war we’re supplying and supporting in Yemen advances our national security.”

Just last week Human Rights Watch alleged that the Saudi-led coalition—which also includes other U.S. Gulf allies Kuwait, Qatar, and the United Arab Emirates—struck a market with U.S.-supplied bombs, killing at least 119 people. Witnesses reported that just 10 of those killed in the market were actually Houthi fighters.

Civilian deaths in Yemen have topped 3,200 as of March 17, according to the Office of the UN High Commissioner of Human Rights. The UN’s human rights chief as also says the Saudi-led coalition has caused twice as many civilian casualties as all other forces fighting in Yemen, with air strikes accounting for the vast majority of those deaths.

As a result, the Dutch parliament has voted to halt all arms trading with Saudi Arabia. The British parliament is under pressure to do the same, and Canada’s defense minister is facing significant backlash for green-lighting a $15 billion deal to sell vehicles and other weapons to the Saudi regime earlier this year.

The U.S. is easily Saudi Arabia’s most important supplier of aerial weapons, responsible for keeping the kingdom supplied with precision guided munitions and “dumb” bombs alike. In response to the uptick in demand for such weapons, Lockheed Martin lmt recently quadrupled production of Paveway II laser-guided bombs (a Saudi Royal Air Force favorite). Companies like Raytheon rtn, Boeing ba, and General Dynamics gd also benefit from the boost in overseas weapons sales that has accompanied the conflicts in Syria, Iraq, and Yemen.

For more about the defense industry, watch:

Sens. Murphy and Paul’s joint resolution seeks to either slow the flow of these air-to-ground weapons to Saudi Arabia or force the kingdom to check its allegedly reckless deployment of them. If signed into law, the legislation would require Saudi Arabia and its coalition partners to take demonstrable precautions that would reduce the risk to civilian lives and infrastructure. The resolution also calls on those countries to prove they are not providing funding for proxy groups designated as foreign terrorists, take more measures to target those groups that are designated as foreign terrorists, and facilitate the flow of humanitarian aid into Yemen.

For a U.S. defense industry that has been able to largely offset slowing U.S. defense spending with foreign military sales, restricting the flow of weapons to a free-spending customer like Saudi Arabia would prove an unwelcome development. Others in Washington will likely see the legislation as a counterproductive measure that would militarily weaken America’s strongest ally in the Gulf region–one that President Obama will personally visit next week in an effort to strengthen bilateral relations.

Sen. Murphy sees it as a matter of national security in itself. Not only is the fight against Houthi rebels in Yemen distracting our allies from the more important fight against the Islamic State, he writes in his statement, but American support for a campaign that is translating into vast humanitarian suffering isn’t helping the U.S. win hearts and minds.

“As the humanitarian crisis continues to deteriorate, anti-American sentiment is spiraling as the local population blames the U.S. for the thousands of civilian deaths resulting from the Saudis’ bombing campaign,” he writes. “This will come back to haunt us.”

The U.K. Wants to Accelerate Purchases of F-35s, Reaper Drones

In the government’s latest five-year defense review, U.K. Prime Minister David Cameron has outlined a plan to increase military spending by £12 billion ($18 billion), in an effort to address threats both conventional and irregular. As a part of the plan, the U.K. government will create two new fighter squadrons, accelerate its acquisition of F-35 fighter jets, purchase additional U.S.-built Reaper drones, and create two new 5,000-strong, rapidly-deployable “Strike Brigades” to combat emerging threats around the globe.

“At its heart is an understanding that we cannot choose between conventional defences against state-based threats and the need to counter threats that do not recognise national borders,” Cameron wrote in the forward to the SDSR. “Today we face both and we must respond to both. So over the course of this Parliament our priorities are to deter state-based threats, tackle terrorism, remain a world leader in cyber security and ensure we have the capability to respond rapidly to crises as they emerge.”

Between now and 2020, the SDSR calls for the purchase of nine Boeing-built P-8 Poseidon submarine hunting aircraft; extending the life of the U.K.’s existing Typhoon fighter jets; forming two additional Typhoon squadrons (built by Eurofighter, a consortium of European defense companies including BAE); and tripling the pace at which it purchases the 138 F-35 Lightning II fighter jets it has on order from Lockheed Martin.

Accelerating its F-35 purchases should prove particularly helpful for both the Royal Navy and Lockheed Martin. The $100 million all-purpose fighter jet has been criticized as too expensive, and ramping up production may be a good way for Lockheed to drive down the cost. Previously the Royal Navy was slated to have just eight F-35s to fly off of its new Queen Elizabeth-class aircraft carriers when the first one hits the water in 2020. Now 24 F-35s should be available to the new carrier from day one.

The most recent SDSR should translate into a shot in the arm for the U.K.’s dwindling armed forces, but it also serves as a potent reflection of just how much the world has changed since the last review in 2010. In 2010, the U.K. was already out of Iraq and winding down operations in Afghanistan. Crimea was part of Ukraine, Syria was still a cohesive state, and a diminished al Qaeda remained the global face of evil. The 2008 financial meltdown still lingered.

Against that backdrop, the 2010 SDSR amounted to wholesale slashing of the U.K.’s military enterprise, cutting ships, aircraft, and a whole lot of people from its future plans (something like 17,000 uniformed personnel were dismissed).

In contrast, the 2015 SDSR reflects both a changing global landscape and a changing U.K. The government is now on firmer financial footing, and with Cameron at the helm the country appears poised to reassert itself on a number of military fronts.

But to be clear, the uptick in U.K. military spending isn’t just about confronting threats posed by the Islamic State or the recent attacks in Paris that killed more than 100 people. Boeing’s P-8 Poseidon, for instance, is designed to track and target the most sophisticated enemy submarines, while plans to design and build a new class of light, general purpose frigates for the Royal Navy suggest a U.K. preparing to confront conventional naval threats from state actors.

Still, recent events like the attacks in Paris and the alleged downing of a Russian airliner in Egypt did leave their mark on the SDSR. For instance, the U.K.’s counter-terrorism spending will increase by 30% over the next five years. Meanwhile, Cameron said he will lay out plans to expand the scope of British bombing raids against Islamic State forces in Iraq and Syria this Thursday.

America’s Gulf Allies are Running Low on Precision Weapons

The U.S. military is moving to accelerate shipments of precision weapons to its Middle Eastern allies as their supplies run low after 13 months of continuous bombing in Syria and Yemen.

Speaking to reporters yesterday at the Dubai Air Show, U.S. Air Force Secretary Deborah Lee James said partners across the region are facing shortfalls of precision guided munitions and are pressing the Pentagon to look for ways to speed up deliveries to the region.

“That’s a key message that I’m going to be taking back to Washington and it’s one that we’re working pretty hard,” James said.

Appearing alongside James in Dubai, U.S. Air Forces Central Command (AFCENT) Lt. Gen. Charles Q. Brown said precision guided munitions are “pretty popular” among U.S. allies in the Gulf region, particularly Saudi Arabia, Bahrain, Qatar, and the United Arab Emirates. Those countries have been variously bombing both ISIS targets in Syria and Houthi rebels in Yemen. All those airstrikes are beginning to take their toll on existing stores of smart weapons.

“Not only have we within AFCENT taken steps to make sure we have the right stocks, but we’re also working with partners as we understand more about how they operate and their expenditure rates to make sure everybody has what they need and we can get the job done,” James said.

It’s fair to say that use is high, or at least higher than usual, says Roman Schweizer, a defense policy analyst at Guggenheim Partners. “There has been a fair amount of participation from our NATO allies and GCC [Gulf Cooperation Council] allies both in Syria and then also Yemen in the case of the Saudis,” Schweizer says. “I think the bigger question is: Is this the new normal? If you expect anti-ISIS operations to continue for some time—and I think the case could be made that they’re going to have to increase rather than decrease—there could be a significant amount of spending directed at replacing these munitions.”

The munitions in question here are largely air-to-ground weapons manufactured by U.S. companies like Boeing “BA”, Lockheed Martin “LMT”, Raytheon “RTN”, and General Dynamics “GD”. Some, like the ever-popular Joint Direct Attack Munition manufactured by Boeing, aren’t actually standalone weapons at all but sensor kits that can be installed on existing “dumb” munitions, imbuing them with GPS and inertial targeting “smarts.”

But ramping up production of smart munitions might be easier said than done. Speaking to Defense News in September, Air Force Chief of Staff Gen. Mark A. Welsh III noted that stocking smart munitions is a problem for the Air Force itself given the vast amount of bombing by it in Syria, Iraq, and elsewhere in recent years.

“Typically if you drop a bomb today, it’s going to take you two years from now to get the appropriation to replace it, another year or two to actually get it on the shelf,” Welsh said at the time. James echoed that caution Tuesday in Dubai, noting that it takes a certain amount of time to ramp up the industrial base to produce a surplus of precision guided weapons.

“It’s not easy to quickly ramp up, and that’s one of the U.S.’s weak points, I think,” says Brad Curran, an industry analyst at Frost & Sullivan. “We spend billions on weapons and some of these basic fundamental things we let atrophy a bit.”

There are things that can be done to accelerate the flow of precision guided munitions to Middle Eastern allies without ramping up production in the near-term, Curran says. The Air Force can push its Gulf allies’ existing contracts for certain weapons to the front of the line or rapidly fill them out of the U.S. Air Force’s own reserves to speed delivery.

Short-term stopgaps not withstanding, the shortfall will ultimately have to be made up by the defense industry. With no sign of a cease fire in Syria, Iraq, or Yemen, America’s Middle Eastern allies will continue to use up their precision weapons stockpiles at a fast rate. Meanwhile, Lt. Gen. Brown said on Saturday that he expects the tempo of U.S. airstrikes to accelerate following several weeks of a slowdown, an action that could further pinch precision weapons supplies.

“These war reserve stocks go up and they go down,” says Byron Callan, a defense industry analyst at Capital Alpha Partners. “There’s certainly going to be business for someone here to replenish all these stockpiles.”

The Spy in General Dynamics’ Corner Office

After Phebe Novakovicmarried Michael Vickers in 1985, the alumnae magazine at her alma mater, Smith College, announced the nuptials. “Mike and Phebe met in the foreign service,” the entry cheerfully reported.

That is what is known in the espionage trade as a cover story. In fact, the two met while working for the Central Intelligence Agency. And Vickers wasn’t just any CIA operative. He was a former Green Beret who became the chief strategist for the agency’s secret program that armed the mujahadeen as they fought to drive the Soviet Union’s army out of Afghanistan.

Novakovic’s role in the agency is more of a “known unknown.” (She and Vickers have both remarried.) Her company biography confirms she was a CIA operations officer. When interviewed, nearly all of her colleagues and fellow board members instantly volunteer, “You know she was in the CIA?” But like any good operative, Novakovic doesn’t so much as whisper a word about her activities. Former colleagues think she spent time overseas, probably under some official government cover, gathering information about military capabilities. “One thing I do know,” says one former government official, “is she wasn’t just an analyst sitting in an office back in D.C.”

At the time, even her closest friends had no clue Novakovic was in the CIA. “I thought she was somewhere in Washington,” says Patricia Anne Lind, who is the godmother of one of Novakovic’s three daughters and co–general counsel of Nine West Holdings. “Clearly I hadn’t known what my best friend was doing.”

Phebe Novakovic long ago left the shadows—but three decades later she still shuns the spotlight. She is allergic to the press (it took her spokesperson a scant few hours to decline an interview for this article), noticeably scarce on the Washington think tank circuit, and limits her contact with most Wall Street analysts to quarterly calls and the occasional investor conference.

Despite that—or perhaps because of it—Novakovic seems to be thriving as CEO of the $31 billion (revenues) defense contractor General DynamicsGD, which is best known for building the M1 Abrams tank, nuclear submarines, and more recently, Gulfstream jets. Nearly three years into her tenure as chief executive, she wins kudos on Wall Street for restoring the company’s profits after a traumatic loss under her predecessor. General Dynamics’ stock has rocketed past its competitors’ since the beginning of last year.

Novakovic, 57, has succeeded with a back-to-basics approach she describes as “doing what we know how to do.” She has slashed spending, expanded profit margins, and returned cash to shareholders. Last year’s earnings, $2.5 billion, were just shy of the company’s record ($2.6 billion, in 2010).

But General Dynamics’ revenues have been flat, and at some point, analysts say, Novakovic will have to chart a strategy that delivers growth—a tricky endeavor in an era in which U.S. defense spending is likely to stagnate. Says Linda Hudson, a former U.S. CEO of defense contractor BAE Systems who once worked with Novakovic: “Phebe has hit it out of the park streamlining the organization. The stock price is phenomenal.” But she thinks defense companies, including General Dynamics, need to bulk up via mergers. “I don’t think it’s going to be a growth market,” Hudson says, “and you need bigger players in order to maintain capacity and weather the ups and downs of defense-spending cycles.” That raises a question: Can a disciplined operator and cost cutter excel at a new and different mission?

True to her CIA past, Novakovic is notoriously elusive, especially when it comes to her personal life. Some years ago, when she was working at General Dynamics but hadn’t yet ascended to the top role, a former company executive recalls, “someone suggested we run an idea past David Morrison.” Morrison was then a top staffer on the House defense appropriations subcommittee, a powerful figure in defense contracting. “Phebe said she would talk to him at dinner,” the former executive recalls. “When I asked if she was seeing him that night, she said, ‘I have dinner with him most nights.’ I knew both of them, but it was only then that I figured out that they were married [to each other].” (Morrison later became Boeing’s chief lobbyist. He has since retired and is studying divinity at Princeton Theological Seminary.)

That’s not to suggest that Novakovic is lacking in wit or charm. In a recent earnings call she came across as confident and direct, spare in her use of CEO jargon. (Novakovic also forgoes another CEO affectation: Rather than travel with a royal-size retinue, she tends to bring no more than two or three executives to Pentagon meetings.) On the earnings call she bantered with analysts but showed a military bluntness in refusing to be budged from her talking points. She dismissed suggestions of a possible weakening in the business-jet market as “rumor intelligence, or RUMINT.” She casually employed words like “parable,” “ephemeral,” and “perturbations.” When an analyst teased her about her use of “axiomatic” and “purported weakness,” she responded, “Yes, well, it helps to have been a liberal arts major. I do know the English language.”

Novakovic’s directness works to her advantage much of the time. “The reason people respond to her,” says Mike Petters, CEO of Huntington Ingallshii, which teams with GD to build attack submarines, “is she absolutely tells you what her expectations are, and when you deliver she takes care of you, and when you don’t she lets you know.” Novakovic, he says, has a “high standard of performance.”

“She is not terribly emotional about any particular aspect of the business,” Petters adds. “She doesn’t put a lot of energy into a lot of things she doesn’t think [are] necessary to running the business.”

In retrospect, Novakovic seems as if she was always destined for the defense world. Her father, a Serbian immigrant, served in military intelligence as a lieutenant colonel in the U.S. Air Force. Novakovic graduated from an Episcopal boarding school in San Antonio and moved on to Smith College in Northampton, Mass., where she majored in government and German. During those years in the mid- to late ’70s—the post–Vietnam War period when the military and the CIA were scorned on many campuses—Novakovic stood out. “Phebe was always very patriotic,” her close friend and classmate Lind says. “She had a more conservative and Republican upbringing” than many peers.

Novakovic went straight into defense after college, analyzing weapons systems for a small Beltway contractor. In 1983 she joined the CIA, where she met Vickers (who taught her to skydive). In 1986 they left for Wharton, where both earned MBAs. Vickers, who until this past spring was undersecretary of defense for intelligence, is only slightly more media friendly than his ex, which helps explain why the names of two such prominent defense players are so rarely linked in public.

Novakovic and her husband, David Morrison—who retired as Boeing’s chief lobbyist and is now studying theology—at a 2013 event.Photo: Stephanie Green—Bloomberg via Getty Images

After grad school Novakovic followed a well-trod path through government (purchaser of defense products and services) to private industry (seller of those products and services). In 1992 she joined the White House Office of Management and Budget and rose quickly to become a top official overseeing the defense and intelligence budgets. Five years later she crossed the Potomac to work as a special assistant to William Cohen, then Defense secretary, and his deputy John Hamre. “She had an enormous amount of authority in the contracting world,” says Nicholas Chabraja, who was then General Dynamics’ CEO and became a mentor to Novakovic.

The company hired her in 2001, and Novakovic meshed well with its no-nonsense culture. “Boeing makes planes; Raytheonrtn makes missiles; General Dynamics makes money,” says Loren Thompson, chief operating officer of the Lexington Institute and a consultant to GD and other defense companies. He says it has a tougher environment than its rivals: “At General Dynamics your contribution is measured on a quarterly basis.” (Thompson adds that “under Phebe, the consequences for failing to perform are even more immediate than they were in the past.”)

It was clear early on that Chabraja was grooming her for a top job. Still, when he retired in 2009, the CEO position went to Jay Johnson, a board member and former Chief of Naval Operations. Novakovic was named the head of marine systems, one of the company’s four divisions, which builds submarines and ships.

As it turned out, Novakovicwas lucky. Chabraja was a tough act to follow. And after a decade of lavish Pentagon spending, the “Army business in particular went into a precipitous decline” with the drawdown in Iraq, notes Myles Walton, an analyst at Deutsche Bank. In Walton’s view, Johnson may have had “the hardest job in defense.”

In an effort to expand into what Johnson called “faster” markets, GD spent nearly $1 billion in 2011 to acquire Vangent, a health care IT provider poised to cash in on Obamacare. The following year, GD spent an undisclosed amount to acquire a civilian cybersecurity company and a maker of wireless network equipment.

In June 2012 General Dynamics announced that Johnson would retire by the end of the year and Novakovic would succeed him. The explanation for that early departure became clear in January 2013, just weeks after Novakovic took over as CEO. The company reported a $1.2 billion drop in 2012 sales in its information systems and technology group and an $800 million fall in sales in its combat systems group. Even more surprising was the announcement that it would take a $2 billion write-down on a long series of acquisitions in its info systems businesses. GD’s $332 million loss for 2012 was the company’s first year in the red in two decades.

“Phebe has hit it out of the park streamlining the organization. [But] I don’t think it’s going to be a growth market, and you need bigger players in order to maintain capacity and weather the ups and downs of defense-spending cycles.”—Linda Hudson, Ex-CEO, U.S., BAE Systems

In her first earnings call, Novakovic made no effort to hide her displeasure with the state of the business—or her predecessor. She blamed the write-down on a “somewhat broken” acquisitions process. “Had I been consulted,” she said, some of the deals “wouldn’t have been done.” She said she would not “venture back into” the acquisitions market “until we have re-established discipline,” and she vowed instead to plow GD’s cash into dividends and stock buybacks. She has repeated that promise, and kept to it, ever since.

Novakovic quickly began “retiring” corporate vice presidents. She consolidated operations and reduced GD’s already lean headquarters staff from 190 to around 140 people today. (The company employs 96,000 overall.) Moves like those have improved cash flow margins from 11.8% in 2012 to 14.6% today, according to S&P Capital IQ.

Novakovic also benefited from some good timing. The economy has rebounded, bolstering demand for Gulfstream jets. And a deal at the end of 2013 blunted the automatic cuts caused by the budget sequester. (It’s not certain Congress and the White House can negotiate another reprieve this year.)

Meanwhile the company scored some lucrative new defense projects, including a $10 billion to $13 billion contract to sell light armored vehicles to Saudi Arabia. GD’s marine division and Huntington Ingalls were jointly awarded a $17.6 billion, 10-year contract to build 10 Virginia-class submarines for the U.S. Navy.

Novakovic is certainly disciplined, but at times she can appear risk-averse—the result perhaps of watching Johnson’s tenure come to a quick end. GD has pulled out of the bidding for several contracts, including the $30 billion to $40 billion U.S. Air Force T-X trainer program, which Novakovic and her team decided were either out of their core business, too risky, or unlikely to provide high returns.

By contrast, when an opportunity feels as if it’s in the company’s wheelhouse, Novakovic pushes hard for a big win. She is now positioning GD to take the majority of what could be a $100 billion program to build 12 Ohio-class nuclear-missile submarines. Novakovic told an investor conference in June that she had no interest in repeating the teaming arrangement with Huntington Ingalls that was demanded by Congress for the Virginia-class subs. “That won’t happen,” she said, adding, “We don’t like it, and second, it’s too much risk.”

In this case, Novakovic’s bluntness may not serve her well. The Ohio-class program is so expensive that it could devour the Navy’s acquisition budget unless Congress is willing to ante up more cash. Spreading the wealth and the jobs is the best way to guarantee a program’s success on Capitol Hill, and some Pentagon officials worry she could alienate key decision-makers. Still, there hasn’t been much reaction so far—another possible salutary result of her low profile. When asked about Novakovic’s comment, one congressional aide whose boss is a big booster of Huntington Ingalls says, “I hadn’t heard it. Frankly, I had to look up [Novakovic’s name] when I got your email.”

The obvious questionis, Where will General Dynamics find new growth? Such queries have grown louder since July, when Lockheed MartinLMT announced plans to acquire Sikorsky Aircraft, maker of the Black Hawk helicopter, for $9 billion. (Lockheed is also spinning off $6 billion in infotech assets, the same line of business that caused trouble for GD.) The purchase, expected to win regulatory approval, will boost and diversify revenues for Lockheed and open additional foreign markets.

Novakovic has been clear about what she doesn’t want to do—pursue new acquisitions or stretch GD outside its comfort zone—but much vaguer about a long-range vision and how she plans to meet the challenges of a Pentagon budget likely to remain flat for years to come, an uncertain strategic environment—will the U.S. keep fighting in the Middle East or finally pivot to Asia?—and technology and manufacturing that is changing far faster than the usual decades-long defense-contracting cycles.

A submarine being painted at General Dynamics’ Electric Boat shipyard in Groton, Conn. Before becoming CEO, Novakovic headed the company’s marine division, which builds ships and subs.Photograph by Jessica Hill—AP

“Phebe has rebuilt credibility with shareholders,” says Byron Callan, an analyst at Capital Alpha Partners, which provides research for institutional investors. “But you have to ask, particularly on the defense side, how much more runway she has raising margins and buying stock back.” Callan argues that “in another year or two she is going to have to articulate a vision of where she is taking the company.”

General Dynamics directors interviewed for this article say that, given her results and Wall Street’s enthusiasm, there is no reason for Novakovic to change what she is doing. Told that some investors complain that she is inaccessible, former CEO Chabraja, who remains a major player on the board, dismissed it as whining. “If it is true she is ignoring investors, she should keep on doing it,” he says. “She has more than doubled the stock.” Chabraja doesn’t believe Novakovic “is averse in principle” to acquisitions. “Right now we are in a period where defense and aerospace have organic growth,” he says, so there is no need for “prattling on about acquisitions.”

Of course Chabraja is best remembered for an acquisition: He bought Gulfstream for $5 billion in 1999. Wall Street was skeptical the business was too far afield. But today Gulfstream is the company’s brightest light: Last year the commercial aerospace division produced 28% of GD’s revenue and 41% of its profits. There’s a three-year wait for a G650, which goes for $64.5 million and can fly 8,000 miles before refueling.

Given all of the uncertainties of the defense market, Novakovic may have to move herself and General Dynamics beyond their comfort zone. Will she find her own golden acquisition in the civilian world to help drive revenues? Or should GD grow by doubling down on next-generation technology like undersea drones or microwave or laser weapons? Perhaps Novakovic already has a plan. So far, though, she’s not telling.

Iran nuclear deal could prompt regional arms race

A nuclear deal struck earlier this week in Vienna between Iran and a group of world powers could go a long way toward easing debilitating sanctions that have crippled Iran’s economy. Although, in the near-term, the agreement could also act as an economic stimulus for global defense companies—particularly those in the U.S.—as regional rivals bolster their defenses.

The deal struck Tuesday dictates that a U.N. conventional arms embargo on Tehran would be lifted within five years, though it could end earlier depending on how quickly Iran complies with other tenets of the agreement. Import restrictions on ballistic missile technology Iran’s armed forces so dearly love—and which make its neighbors increasingly nervous—could lift within eight years.

The details of the deal still have to pass muster in the U.S. Congress and in the capitals of the other so-called P5+1 nations that hammered out the deal with Iran: China, France, Germany, Russia, and the U.K. Many analysts see an arms race heating up in the region whether the deal succeeds or not as tensions between Iran and the states of the Gulf Cooperation Council (GCC) heighten. An appetite for newer and better weapons could boost sales for U.S. defense companies like Boeing BA, Northrop Grumman NOC, General Dynamics GD, Lockheed Martin LMT, and Raytheon RTN.

In some cases, a military spending spree is already underway. In recent months the U.S. has cut deals for more than $6 billion in military hardware with Israel and America’s Gulf Cooperation Council (GCC) allies, who worry that more than $100 billion in unfrozen Iranian assets and an improved Iranian economy will fuel aggression in the region. “The threat perception with Iran is high,” says Alireza Nader, an Iran analyst at Rand Corp. “And it’s going to remain high in the near term.”

Iran’s regional adversaries—primarily Saudi Arabia, but also other GCC countries like Kuwait, Bahrain, and the UAE—see the nuclear accord as a means for Iran to bolster its conventional military. Iran could use its oil wealth and new assets to arm various militant groups it supports in other countries, which include Hezbollah in Lebanon, Shia groups in Syria and Iraq, and—allegedly—Houthi rebels who are the target of an ongoing Saudi aerial bombing campaign in Yemen.

Iran fears mean more major arms deals are likely in the offing as countries around the region attempt to project power and deter Iranian aggression.

“The way this will actually express itself in terms of arms sales is that there are going to be capabilities that the [United State’s] partners invest in to deal with those [proxy] threats—internal security, intelligence, border control, law enforcement, the less sexy stuff,” says Melissa Dalton, a fellow at the Center for Strategic and International Studies. “The capabilities that are going to be most effective to address the Iranian threat are in the law enforcement and intelligence side of the house. These countries are also going to come to the United States with requests for things like more fighter aircraft,” she adds. “[They’ll want] more visible, conventional, robust capabilities for projecting power and creating a conventional deterrent.”

Part of conventional arms buildup stems from a fear that at some point Iran will begin acquiring more advanced weaponry, likely from Russia or China, both of whom support repealing the U.N. arms embargo. For countries seeking out military hardware from the U.S., new military deals also has other advantages, Nader says. “It’s not just about countering Iran, it’s about building closer security ties with the U.S. as well,” he says.

One way Saudi Arabia and Gulf nations can strengthen relations with the U.S. is through the purchase of advanced American missile defense systems. U.S. policy makers have long sought to build an integrated regional missile shield to help counter any Iranian missile threats. U.S. missile defense system makers Raytheon and Lockheed Martin have already been active in the region—Raytheon has inked $5 billion worth of missile defense equipment contracts since December, a sizable chunk of that in the Middle East.

“In the wake of this deal, we’ll likely see both public and private efforts on the part of the administration and the military step up sales in key capability areas, so that if Iran does become more aggressive the Gulf countries can protect themselves,” says Melissa Dalton, a fellow at the Center for Strategic and International Studies. Out on the field, that will probably look like a mix of radars, missile interceptors, communication infrastructure and other technical elements that facilitate information sharing within and between countries, she says.

Israel—a vocal opponent of any deal with Iran—is set to receive a $1.9 billion shipment of U.S. weapons that many analysts see as a U.S. effort to assuage Israeli concerns over the Iran deal. Approved in May, the deal includes 250 AIM-120C Advanced Medium Range Air-to-Air Missiles, 50 BLU-113 “bunker-buster” bombs capable of penetrating 20 feet of reinforced concrete, and 3,000 Hellfire anti-armor missiles (Lockheed, Raytheon, and General Dynamics will all see a piece of that deal).

Pending arms deals also include a deal with Saudi Arabia for 10 Sikorsky MH-60R helicopters and associated equipment valued at $1.9 billion and another $1.75 billion transaction for up to 202 Lockheed Martin-built PAC-3 missiles. The UAE holds a contract for more than 1,000 laser-guided bombs built by Boeing and Raytheon worth $130 million. Additionally, another potential $900 million deal for a dozen of Lockheed’s High-Mobility Artillery Rocket Systems and 100 rockets is also on the table. These type of deals aren’t likely to become more commonplace in the future as increasingly edgy Gulf allies push the U.S. for more advanced weaponry as a means to assuage regional fears about Iran.

One area to watch going forward, CSIS’s Dalton says, is technologies that help Gulf nation’s cope with Iran’s proxy groups in the region rather than its conventional military or ballistic missile forces. Those technologies are less about “warheads on foreheads” and more about information, whether that’s cyber capabilities, traditional ISR (also known as intelligence, surveillance, and reconnaissance technologies), or software tools for tracking potential militant threats through data mining.

“It really comes down to being able to provide warnings: ISR, command and control, and having a common picture of what’s going on in the region,” she says. “To the degree to which there are opportunities for the defense industry, that’s an area to keep an eye on.”

These companies have made every Fortune 500 list for 61 years

Allow us to introduce the Honorable 57. That’s how many companies have achieved the impressive feat of making the Fortune 500 every year since the list’s inception in 1955.

These businesses have weathered economic turmoil and rapid innovation in their industries. They’ve survived boardroom battles and bankruptcies. All the while, they’ve maintained a spot among the cream of the corporate crop, year after year, for six decades.

At first blush, little seems to have changed since 1955. General MotorsGM topped the Fortune 500 back during at the height of the Eisenhower era when a new Chevy only cost around $2,000. Today, GM is still near the top of the list at No. 6. Sure, the car maker briefly fell out of the top 10 five years ago during its bankruptcy. But it never came close to tumbling out of the list entirely.

General ElectricGE also holds down a top slot this year at No. 8, near the No. 4 ranking it had in 1955. The venerable industrial conglomerate has also seen its share of ups and downs during the past six decades. Like GM, General Electric received a government bailout during the recent financial crisis to help prop up its lending arm. And like GM, the company rebounded after a few lean years.

One of the most interesting things about this list of permanent Fortune 500 members is how some of them have evolved. For instance, 1955’s top 10 included two of the “Seven Sisters” spawned from Standard Oil’s breakup by the U.S. Supreme Court. Those two companies became Exxon and Mobil, whose merger 45 years later would create what is now the largest company in the Honorable 57. ChevronCVX, another Standard Oil descendant, is the second-largest.

IBMIBM, No. 24 in this year’s Fortune 500 with $94 billion in annual revenue, is another regular. But in 1955, IBM was far from the giant it is today. At that point, Big Blue was still selling computers built with vacuum tubes and had just $461 million in sales — good for No. 61 that year. The tech revolution had yet to really start.

Meanwhile, PepsiCoPEP has climbed more than 320 spots in over 60 years, to reach No. 43 on this year’s list. That’s higher than rival Coca-ColaKO, which has improved from No. 126 in 1955 to No. 58 this year.

Executives in front of a bank of IBM 729 magnetic tape drives, 1962.Photograph by Robert W. Kelley—The LIFE Picture Collection/Getty Images

While some companies have spent years climbing up the Fortune 500, others have slowly dropped down the list. For example, McGraw Hill FinancialMHFI, the publisher and stock market index-owner, ranked as high as No. 209 in 1994. But this year, it was down to No. 500, just a hair from falling off the list entirely. Can it hang on until next year to maintain its streak?

Here are some other interesting facts on the Honorable 57:

– In 1955, only the top 21 companies from the Fortune 500 had annual revenues above $1 billion (not adjusting for inflation).

– This year’s No. 500 company, McGraw Hill, pulled in more than $5 billion in 2014, which would have ranked third in 1955.

– The company in this group with the highest annualized return to shareholders is Altria GroupMO — aka the tobacco-maker formerly known as Philip Morris — at 20.2%. Philip Morris debuted on the Fortune 500 in 1955 ranked No. 218 before riding decades of big profits to eventually reach the top 10. It was still in that upper echelon as recently as the mid-1990s. But years of costly cigarette lawsuits and a decline in the number of smokers hit the company hard, leading to the name change and a lower spot on this year’s list — No. 169.

– The lowest annualized return to shareholders belongs to AlcoaAA, at 6.4%. Known as the Aluminum Company of America when it ranked No. 35 on the 1955 Fortune 500, Alcoa fell five spots to No. 125 on this year’s list.

– We were unable to calculate the annualized total return for five companies from the Honorable 57 because of reasons like bankruptcy reorganizations that led to the issuing of “new” company stock (GM, auto parts supplier Dana Holding and fiberglass manufacturer Owens Corning) as well as companies being taken private (H.J. Heinz and glass container company Owens-Illinois).

– The industry sector with the most Honorable 57 companies is food and beverage, with 10, led by food processing and storage giant Archer Daniels MidlandADM and Pepsi. Seven companies from the aerospace and defense sector made the list.

– The only Honorable 57 company involved in the financial sector is General Electric, which plans to sell its lending arm, GE Capital. Meanwhile, only two tech companies have made the list every year since its inception — IBM and Motorola’s successor, Motorola Solutions — showing just how hard it is to keep innovating.

– In 1955, the Fortune 500 included some relatively new companies like General DynamicsGD, the defense contractor founded just a few years earlier, in 1952. Owens Corning, established in 1938, was an adolescent business at the time while industrial conglomerate United Technologies, founded as United Aircraft Corporation, had just reached age 21.

Man dwarfed by gigantic gears at a General Electric plant ,1942.Photograph by Dmitri Kessel — Time & Life Pictures/Getty Images

– The group’s elder statesman is easily E.I. du Pont de Nemours, more commonly known as DuPontDD. Founded in 1802, the chemicals giant ranked No. 10 on the Fortune 500 in 1955, but came in at No. 87 this year. Colgate-PalmoliveCL is next-oldest, dating back to 1806, when William Colgate first opened a soap and candle shop in lower Manhattan.

Click on the interactive graphic below for a look at all of the Honorable 57 companies and to see how they have grown since making the first Fortune 500 list 60 years ago. (NOTE: Honorable 57 companies are represented by the black circles.)